China Has No Plans to Devalue Yuan, Vice President Li Says

China Vows to Look After Investors
  • Ascribes Fed's rate increase as spurring market volatility
  • China torn by 'pull for control' vs market desire: economist

China’s vice president underlined the Communist leadership’s pledge to avoid pursuing a policy of devaluation of the yuan, after criticism that his nation’s policy makers haven’t been clear on their intentions with the exchange rate.

"The fluctuations in the currency market are a result of market forces, and the Chinese government has no intention and no policy to devalue its currency," Li Yuanchao, who is also a member of the party’s Politburo, said in an interview with Bloomberg News Thursday after arriving at the World Economic Forum’s annual meeting in Davos, Switzerland.

Li Yuanchao
Li Yuanchao
Photographer: Matthew Lloyd/Bloomberg

Moves last year to make the yuan more responsive to market forces, and to end its peg to the dollar, have spurred confusion among market participants, and days ago the U.S. Treasury chief to urge clear communication on the matter. Secretary Jacob J. Lew’s message, delivered in a call with an aide to President Xi Jinping, was echoed in Davos by attendees including International Monetary Fund Managing Director Christine Lagarde.

Li redirected concerns about exchange-rate volatility to actions by the Federal Reserve, saying "fluctuations in the currency market started with the raising of interest rates by the Fed." Li came to the Davos gathering with a message of reassurance that the world’s second-largest economy remains on track, despite international investor concerns. He and fellow delegation members pledged to stay with a reform program that has seen China move away from reliance on investment, in the process slowing its growth.

The comments by the Chinese vice president on the yuan follow a volatile start for the year, which began with an unexpectedly large reduction in the reference rate in onshore trading in China. The currency dropped 1.5 percent in the first week of January, stoking concern about policy intentions. More than two decades ago, China opted for a sharp depreciation of more than 30 percent in 1994.

After the drop early this month, the People’s Bank of China intervened to support the yuan, whose fall had accompanied a renewed sell-off in Chinese stocks. Authorities also took steps to drive up the cost of borrowing in yuan in the offshore market in Hong Kong, aiming to thwart speculative bets against that exchange rate. Along with tightening restrictions on the flow of money across the country’s borders, the steps all spurred doubts among global investors about the leadership’s commitment to give markets a central role and make the yuan an international currency.

Give Credit

"To give the leadership credit, they have put the key objectives in sharper perspective, but by doing this they have brought the tension into sharper focus," said Louis Kuijs, the head of Asia economics in Hong Kong at Oxford Economics Ltd., who previously worked at the World Bank in Beijing. "We need to see how this will be resolved -- whether the pull of the desire for market-oriented reforms is going to be stronger than the pull for control."

Fang Xinghai, vice chairman of the China Securities Regulatory Commission, acknowledged in a panel discussion hosted by Bloomberg Thursday in Davos that some observers might have thought sometimes China was moving "back to a crawling peg" against the dollar.

"There is a communication issue," Lagarde said on the same panel. Gary Cohn, president of Goldman Sachs Group Inc., echoed that "the communication is really what’s important here."

Fang, who participated in the Li interview, responded on the earlier panel that "you’re right we should do a better job, and we are learning."

Global Phenomenon

Li highlighted that it’s not just the yuan that has been moving lately, pointing to reverberations from the Fed’s decision in December to hike interest rates for the first time in almost a decade. "The fluctuations in China’s currency market are only moderate fluctuations. There are more severe fluctuations as well," he said. Among other currencies seeing declines this month has been India’s rupee, which hit a record low this week.

The incentive to free up China’s exchange rate increased after the IMF said in November that the yuan qualified to join its basket of reserve currencies, and policy makers pledged to pare back capital controls by 2020 -- a key step toward yuan internationalization.

As part of the effort to internationalize the yuan, authorities in August moved to allow the market a greater say in setting the currency’s value, spurring its decline. They followed up in December by flagging a loosening of the yuan’s links to the dollar and said its strength would be judged against a basket of currencies.

The yuan fell to a five-year low last week, bringing its drop over the past year to more than 5 percent. Still, despite recent weakness against the dollar, the yuan has gained 36 percent over the past decade against a Bloomberg basket of 13 currencies designed to replicate the official CFETS RMB Index.

"So on the one hand what China’s trying to do is expand our (yuan) market," Vice President Li said. "On the other hand we also need to ensure that the currency stays stable."

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